TAX DEDUCTIONS, CREDITS, AND TUITION/FEE DEDUCTION. DANIEL MADDEN Certified Public Accountant Tel:

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1 TAX DEDUCTIONS, CREDITS, AND TUITION/FEE DEDUCTION DANIEL MADDEN Certified Public Accountant Tel:

2 Introduction Background 3 ways a taxpayer can deduct education costs Tax Credits Hope Credit or Lifetime Learning Credit Tuition and fees deductions Itemized deductions unreimbursed business expenses Itemized Deduction vs. Tax Credit Recent Court Cases Miscellaneous Questions?

3 3 ways a taxpayer can deduct education costs Tax credits (Hope or Lifetime Learning) Qualified tuition costs can be used to compute tuition tax credits. A tax credit is a direct reduction of tax liability. Tuition and fees deduction (Flat $4K deduction) Qualified costs are deductible from gross income subject to limitations. Tax deductions (Itemized deduction of entire tuition) Qualified MBA tuition costs may be deductible from your personal income taxes as unreimbursed costs on form 1040 Schedule A Line 23. A tax deduction reduces taxable income.

4 Tax Credit vs. Deduction A tax credit will reduce tax liability dollar for dollar A tax deduction will lower taxable income

5 Tax Credits (first method) Hope Credit Only available for the first 2 years of school ONLY. Max credit is $1,500 per student per year

6 Tax Credits, con t. Lifetime Learning Credit For graduate school and professional degrees Up to 20% of the first $10,000 in allowable costs or $2,000 Only allowable for taxpayers with income less than $43K with a phase out for income at $53K and approximately double for those married (must file jointly)

7 Tax Credits, con t. Columbia University will issue a 1098-T form for all students. Credits are claimed on Form for domestic students and contact SFS for 1098T if you are international Student loans are deemed payments by a taxpayer in the year of borrowing Due to the fact that they are almost impossible to discharge Case Lockhart vs. US affirmed unanimously by Supreme Court (12/05) that Social Security benefits can be garnished (67 year old and disabled 15%).

8 Tuition & Fees Income Deduction (second method) Above the Line deduction to arrive at AGI (adjusted gross income) Maximum allowable deduction is $4,000 for taxpayers with AGI less than $65K Allowable deduction reduced to $2,000 when AGI exceeds $65K but less than $80K Amounts noted are doubled for married filing jointly No tuition & fees deduction is permitted if the Lifetime Learning or Hope credit is taken (pick one!) Reported on Line 34 of Form 1040 Page 1 with supporting form 8917 (this is a new form)

9 Student Loan Interest Income Deduction Amounts must be paid and NOT accrued in order to take deduction Maximum allowable deduction from income - $2,500 over the life of the loan Allowable deduction reduced when income exceeds $50K and eliminated at $70K Reported on Line 33 of Form 1040 Page 1

10 Claiming MBA costs as unreimbursed business expenses (third method) Non-deductible costs are those that qualify an individual for a new trade or business You must be in the field already The MBA must improve your skills The MBA must be the expressed requirement of employer or law/regulations The IRS generally challenges MBA program deductions due to generality of courseload more and more people are being audited!! Self-employed individuals unless you have been actively engaged as a self-employed individual, you must not attempt to deduct educations costs on Schedule C (profit/loss from business).

11 Recent Court Cases Galligan Law Librarian Lewis Telecommunications Exec Per Lewis, he was called upon to negotiate increasingly complex contracts for a variety of clients. The tax court ruled that this was not specific enough. Lewis became eligible for a new trade/business Zheng Overall improvement in skill level. No deduction Weyts Columbia JD/MBA student Summer Associate in employee directory Unable to prove same pay scale as full-time Not assigned the same work Earned three credits Court denied deduction by stating that the petitioner had an uninterrupted continuity in his legal education. It is necessary to break the education cycle and engage in a trade/business before deducting educational expenses. The fact that the break is only for a short period of time will not necessarily deny the deduction. An actual break must occur!

12 Miscellaneous Items Education Assistance Programs from Employers Up to $5,250 received by an employee for qualified educational expenses may be excluded from gross income under and EAP See publication 15-B pages 7-8 Forgiveness of Debt Pursuant to certain student loan agreements, if timely payments are made, a percentage of loan debt may be forgiven. Forgiveness of debt is taxable unless taxpayer is in bankruptcy. You will get a Job Search Costs Job search costs incurred in seeking employment in the trade or business are allowable as a unreimbursed business expense. Not contingent upon job offer or acceptance Subject to a 2% AGI discount. More details Publication 970 Tax Benefits of Education

13 Good Luck! DANIEL MADDEN Certified Public Accountant Tel:

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